Publication EU stress-test exercise. Key messages on methodological issues , download
ECB/2010/7 Regulation (EU) No 674/2010 of the ECB of 23 July 2010 amending Regulation (EC) No 63/2002 (ECB/2001/18) concerning statistics on interest rates applied by monetary financial institutions to deposits and loans vis-à-vis households and non-finan, en
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No. 1230: Time variation in U.S. wage dynamics, by Boris Hofmann, Gert Peersman, Roland Straub, description, download
(JEL: C32, E24, E31, E42, E52) This paper explores time variation in the dynamic effects of technology shocks on U.S. output, prices, interest rates as well as real and nominal wages. The results indicate considerable time variation in U.S. wage dynamics that can be linked to the monetary policy regime. Before and after the "Great Inflation", nominal wages moved in the same direction as the (required) adjustment of real wages, and in the opposite direction of the price response. During the "Great Inflation", technology shocks in contrast triggered wage-price spirals, moving nominal wages and prices in the same direction at longer horizons, thus counteracting the required adjustment of real wages, amplifying the ultimate repercussions on prices and hence increasing inflation volatility. Using a standard DSGE model, we show that these stylized facts, in particular the estimated magnitudes, can only be explained by assuming a high degree of wage indexation in conjunction with a weak reaction of monetary policy to inflation during the "Great Inflation", and low indexation together with aggressive inflation stabilization of monetary policy before and after this period. This means that the monetary policy regime is not only captured by the parameters of the monetary policy rule, but importantly also by the degree of wage indexation and resultant second round effects in the labor market. Accordingly, the degree of wage indexation is not structural in the sense of Lucas (1976).
No. 1229: Inflation and inflation uncertainty in the euro area, by Guglielmo Maria Caporale, Paolo Paesani, Luca Onorante, description, download
(JEL: E31, E52, C22) This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steadystate inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.
No. 1228: Trusting the bankers: a new look at the credit channel of monetary policy, by Matteo Ciccarelli, Angela Maddaloni, José-Luis Peydró, description, download
(JEL: E32, E44, E5, G01, G21) Any empirical analysis of the credit channel faces a key identification challenge: changes in credit supply and demand are difficult to disentangle. To address this issue, we use the detailed answers from the US and the confidential and unique Euro area bank lending surveys. Embedding this information within a standard VAR model, we find that: (1) the credit channel is active through the balance-sheets of households, firms and banks; (2) the credit channel amplifies the impact of a monetary policy shock on GDP and inflation; (3) for business loans, the impact through the (supply) bank lending channel is higher than through the demand and balance-sheet channels. For household loans the demand channel is the strongest; (4) during the crisis, credit supply restrictions to firms in the Euro area and tighter standards for mortgage loans in the US contributed significantly to the reduction in GDP.
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No. 1227: Exports and sectoral financial dependence: evidence on French firms during the great global crisis, by Jean-Charles Bricongne, Lionel Fontagné, Guillaume Gaulier, Daria Taglioni, Vincent Vicard, description, download
(JEL: F02, F10, G01) The unprecedented drop in international trade during the last quarter of 2008 and the first quarter of 2009 has mainly been analysed at the macroeconomic or sectoral level. However, exporters who are heterogeneous in terms of productivity, size or external financial dependence should be heterogeneously affected by the crisis. This issue is examined in this paper by using data on monthly exports at the product and destination level for some 100,000 individual French exporters, up to 2009M4. We show that the drop in French exports is mainly due to the intensive margin of large exporters. Small and large exporters are evenly affected when sectoral and geographical specialisations are controlled for. Lastly, exporters (small and large) in sectors structurally more dependent on external finance are the most affected by the crisis.
Announcing 20100061 (MRO,liquidity providing), for 7 days deadline 09:30, more
Euro area balance of payments in May 2010 and international investment position at the end of the first quarter of 2010, more
No. 1226: Chronicle of currency collapses: re-examining the effects on output, by Matthieu Bussière, Sweta C. Saxena, Camilo E. Tovar, description, download
(JEL: E32, F31, F41, F43) The impact of currency collapses (i.e. large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (i.e. ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction, and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, i.e. one-time events induce exchange rate and output dynamics that differ from consecutive episodes.
No. 1225: Price and wage formation in Portugal, by Carlos Robalo Marques, Fernando Martins, Pedro Portugal, description, download
(JEL: C42, D40, E31, J30) This paper brings together empirical research on price and wage dynamics for the Portuguese economy based both on micro and macro data. As regards firms' pricing behaviour the most noticeable finding is that prices in Portugal are somewhat less flexible than in the United States but more flexible than in the Euro Area. Regarding firms' wage setting practices, we uncover evidence favouring the hypothesis of aggregate and disaggregate wage flexibility. Despite the existence of mandatory minimum wages, the presence of binding wage floors and the general use of extension mechanisms, the firms still retain some ability to circumvent collective agreements via the mechanism of the wage cushion. The evidence also suggests that Portuguese wages behave in a fashion consistent with the wage curve literature, but the responsiveness of real wages to unemployment changes may have declined over the last decade.
No. 1224: Wages, labor or prices: how do firms react to shocks?, by Emmanuel Dhyne, Martine Druant, description, download
(JEL: D21, E30, J31) Survey results in 15 European countries for almost 15,000 firms reveal that Belgian firms react more than the average European firm to adverse shocks by reducing permanent and temporary employment. On the basis of a firm-level analysis, this paper confirms that the different reaction to shocks is significant and investigates what factors explain this difference. Although the explanatory value of the variables is limited, most of the explanatory power of the model being associated with the dummy variables coding for firm size, sector and country, the variables investigated provide valuable information. The importance of wage bargaining above the firm level, the automatic system of index-linking wages to past inflation, the limited use of flexible pay, the high share of low-skilled blue-collar workers, the labor intensive production process as well as the less stringent legislation with respect to the protection against dismissal are at the basis of the stronger employment reaction of Belgian firms. On the contrary, employment is safeguarded by the presence of many small firms and a wage cushion.
No. 1223: The dark side of bank wholesale funding, by Rocco Huang, Lev Ratnovski, description, download
(JEL: G21, G28, G33) Banks increasingly use short-term wholesale funds to supplement traditional retail deposits. Existing literature mainly points to the "bright side" of wholesale funding: sophisticated financiers can monitor banks, disciplining bad but refinancing good ones. This paper models a "dark side" of wholesale funding. In an environment with a costless but noisy public signal on bank project quality, short-term wholesale financiers have lower incentives to conduct costly monitoring, and instead may withdraw based on negative public signals, triggering inefficient liquidations. Comparative statics suggest that such distortions of incentives are smaller when public signals are less relevant and project liquidation costs are higher, e.g., when banks hold mostly relationship-based small business loans.
No. 1222: Monetary policy and capital regulation in the US and Europe, by Ethan Cohen-Cole, Jonathan Morse, description, download
(JEL: E52, E58, G18, G28) From the onset of the 2007-2009 crisis, the Federal Reserve and the European Central Bank have aggressively lowered interest rates. Both sets of changes are at odds with an anti-inflationary stance of monetary policy; indeed, as the crisis began in August 2007 inflation expectations were high and rising, particularly in the United States. We have two additions to the literature. One, we present a model economy with a leveraged and regulated financial sector. Two, we find optimal Taylor rules for our economy that are consistent with a strong pro-inflationary reaction during financial crisis while maintaining a standard output-inflation mandate. We have three interpretations of our results. One, because the Federal Reserve has partial control over bank regulation it can exercise regulatory lenience. Two, the Fed’s stronger output orientation means that it will potentially respond more quickly when faced with constrained banks. Three, our results support procyclical capital regulation.
No. 1221: Financial regulation, financial globalization and the synchronization of economic activity, by Sebnem Kalemli-Ozcan, Elias Papaioannou, José-Luis Peydró, description, download
(JEL: E32, F15, F36, G21, G28, O16) We identify the effect of financial integration on international business cycle synchronization, by utilizing a confidential database on banks’ bilateral exposure and employing a country-pair panel instrumental variables approach. Countries that become more integrated over time have less synchronized growth patterns, conditional on global shocks and country-pair factors. To account for reverse causality and measurement error, we exploit variation in the transposition dates of financial legislation. We find that increases in financial integration stemming from regulatory harmonization policies are followed by more divergent cycles. Our results contrast with those of the previous studies which suffer from the standard identification problems.
No. 1220: The gains from early intervention in Europe: Fiscal surveillance and fiscal planning using cash data, by Andrew Hughes Hallett, Moritz Kuhn, Thomas Warmedinger, description, download
(JEL: E62, H50, H68) This paper does two things. First it examines the use of real time inter-annual cash data and the role of early interventions for improving the monitoring of national fiscal policies and the correction of fiscal indiscipline. Early warnings are important because they allow us to spread the necessary adjustments over time. Examples from Germany and Italy show that large corrections are often necessary early on to make adjustments later on acceptable and to keep debt ratios from escalating. There is a credibility issue here; we find the difference between front-loaded and back-loaded adjustment schemes is likely to be vital for the time consistency of fiscal policymaking. Second, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improvement tests more often. Thus the budget savings from early intervention and the use of cash data are significant; in our examples they are similar in size to the operating budget of the department of housing and urban development in Germany. Similar results apply in other Eurozone countries.
No. 1219: Transmission of government spending shocks in the euro area: Time variation and driving forces, by Markus Kirchner, Jacopo Cimadomo, Sebastian Hauptmeier, description, download
(JEL: C32, E62, H30, H50) This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers.
CON/2010/57 Opinion on the transfer of prudential supervision tasks to the Austrian Financial Market Authority, en
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Monthly Bulletin Monthly Bulletin, July 2010, download
Statistics Pocket Book Statistics Pocket Book, July 2010, download
Publication Article, Monthly Bulletin, July 2010, pp 53-66, Labour market adjustments to the recession in the euro area , download
Publication Article, Monthly Bulletin, July 2010, pp 67-83, The effectiveness of euro area fiscal policies , download
Publication Article, Monthly Bulletin, July 2010, pp 85-96, The impact of the financial crisis on the central and eastern european countries , download
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Press release Review of the international role of the euro, en
Publication The international role of the euro , download
Announcing 20100058 (LTRO,liquidity providing), for 28 days deadline 09:30, more
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Occasional paper no. 117 Extraordinary measures in extraordinary times – Public measures in support of the financial sector in the EU and the United States , by Stéphanie Marie Stolz and Michael Wedow, download
Occasional paper no. 116 Securities clearing and settlement in China: markets, infrastructures and policy-making , by Patrick Hess, download
Publication Monthly Report on the Eurosystem's covered bond purchase programme, June 2010 , download
CON/2010/53 Opinion on restrictions on short selling, en
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Publication Letter from the ECB President to Mr Ioannis A. Tsoukalas, Member of the European Parliament, on questions related to the Greek crisis , download
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CON/2010/52 Opinion on a proposal for a Council regulation amending Regulation (EC) No 974/98 as regards the introduction of the euro in Estonia and on a proposal for a Council regulation amending Regulation (EC) No 2866/98 as regards the conversion rate , en
Speech Gertrude Tumpel-Gugerell: The ECB’s actions during the recent crisis and the policy elements needed for a sound recovery, en
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